TriMas Corp (TRS) 2018 Q3 法說會逐字稿

Good day, and welcome to the TriMas Third Quarter 2018 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Sherry Lauderback. Ma'am, please go ahead.

Thank you, and welcome to the TriMas Corporation Third Quarter 2018 Earnings Call. Participating on the call today are Tom Amato, TriMas' President and CEO, and Bob Zalupski, our Chief Financial Officer. After our prepared remarks on our third quarter results and updated 2018 outlook, we will open up the call for your questions.

In order to assist with the review of our results, which have included the press release and PowerPoint presentation on our company website, www.trimascorp.com, under the Investors section. In addition, a replay of this call will be available later today by calling (888) 203-1112 with a replay code of 6060513.

Before we get started, I would like to remind everyone that our comments today, which are intended to supplement your understanding of TriMas, may contain forward-looking statements that are inherently subject to a number of risks and uncertainties. Please refer to our Form 10-K for a list of factors that could cause our results to differ from those anticipated in any such forward-looking statements. Also, we undertake no obligation to publicly update or revise any forward-looking statements, except as required by law. We would also direct your attention to our website, where considerably more information may be found.

I would also like to refer you to the appendix in our press release issued this morning or included as part of this presentation which is available on our website, for the reconciliations between GAAP and non-GAAP financial measures used during this conference call. Today, the discussion on the call regarding our financial results will be on an adjusted basis, excluding the impact of special items.

At this point, I would like to turn the call over to Tom Amato, TriMas' President and CEO. Tom?

Good morning, and thank you, Sherry. Let me start by taking a few minutes to remind our investors how we reshaped TriMas over the past couple of few years. Turning to Slide 3, on my first earnings call a few years ago, the themes at TriMas were focused on a high sense of urgency on needed operational improvements and realignment steps. Our actions, which have been enumerated on prior calls, have significantly strengthened TriMas. We concurrently accelerated enhancing our businesses through growth initiatives and reigniting our M&A focus as well as overall enterprise-wide planned and capital allocation -- planning and capital allocation priorities. With that background, I'll remind those on the call that TriMas operates businesses with leading brand names in niche markets, each of which relies on product and process innovation, and a deep commitment to partnering with our customers as key differentiators. We are now solidly operating under the TriMas Business Model, which has driven significant improvements and has provided a platform to improve reliability in TriMas' performance which is a positive attribute for our customers, employees and investors.

All of the metrics on this page have improved since redirecting TriMas. On an LTM basis, TriMas revenues are about $860 million, adjusted EBITDA is about 19%, net leverage is currently 1.5x, down from 2.9x since Q3 2016, and we have a market capitalization around $1.3 billion

Turning to Slide 4, I am pleased to report our third quarter results. TriMas has built momentum through 2018 and this continued in the third quarter with our teams delivering results ahead of expectations. Third quarter net sales were up 6.9% to $224 million, with growth in all 3 segments. And for the first time all year, currency exchange was slightly unfavorable, so our organic growth was actually 7.2%. We continue to be pleased with our ability to capture the robust demand we are seeing in many of our end markets and the traction we are gaining with our new products and process innovation.

Third quarter operating profit increased 4.2% to $30.2 million, and we posted an operating profit margin of 13.5%. The positive impact of higher sales levels, performance improvements and prior realignment actions offset the impact of higher material costs which approximated $2 million, or $0.03 per share higher than the prior year. Earnings per share was up 23.1% to $0.48 compared to $0.39 in the prior year quarter driven by the impact of higher sales, operational improvements, and lower effective tax rate.

Moving to Slide 5, our focus on cash flow conversion is evident. For the quarter, free cash flow was up 24.3% and year-to-date was up 11.2% to nearly $71 million. Our free cash flow conversion continues to be the fuel that drives TriMas and our capital allocation options, so we are pleased with our progress.

At this point, I would like to transition to our third quarter segment performance beginning on Slide 7 with our Packaging segment. Third quarter sales were up 6.4% or approximately 7% organically to $95 million, with sales increases largely related to the health, beauty and home care and industrial end markets. Consistent with the first half of the year, we continue to see solid growth in both North America and Asia and quoting activity in all of our end markets remains robust.

Third quarter operating profit was as planned at $22.1 million or 23.2% of sales. These are solid results, particularly when considering resin, steel and freight costs were all higher than planned and we had less favorable mix. As a result of our year-to-date performance, we are increasing our full year Packaging guidance with organic sales growth to be about 6%, up from 5%, and with operating profit margin remaining in the 22% to 24% range.

Continuing on Slide 8 with our Aerospace segment, net sales for the third quarter were $49.1 million, up about 1% from prior year as higher demand more than offset the impact of our decision to exit less profitable products. I would like to note that this was our highest revenue quarter for TriMas' Aerospace ever. Our reorganized, refocused and reenergized commercial and technical teams continue to drive solid order intake as compared to the 2017 levels and the delivery for these orders will stretch now into 2019. As I mentioned last quarter, we have also been seeing some pick up in the military and defense area, largely through our distribution customers. We continue to focus on expanding the use of products on new and existing fixed and rotary wing platforms as well as the unmanned aerial market and we continue to make progress against customer qualifications to expand our product offerings overall.

Third quarter operating profit was up 6.1% to $8.3 million, and the margin percent increased to nearly 17%. This improvement is due to higher sales and performance levels which more than offset costs and temporary inefficiencies related to negotiating and finalizing a revised collective bargaining agreement at one of our US plants. Although negotiations were longer and more distracting than anticipated, we now have in place a labor agreement which extends to 2021. We achieved progress in our operations over the past year. However, we continue to have more to do, particularly in our commodity-lite fastener product line which operates in a challenging commercial environment. We expect to continue working through improving this product line over the balance of the year and into 2019.

Regarding the full year guidance for our Aerospace segment, we expect to achieve sales growth of about 2% with fourth quarter shipments showing growth over Q4 2017. We further expect operating profit margin to be closer to 15% as compared to our original range of 15% to 17% largely driven by the temporary inefficiencies related to finalizing the new collective bargaining agreement.

Turning to Slide 9, our Specialty Products segment achieved a net sales increase of more than $8 million or 11.6% to $79 million. We operate in 2 end markets in Specialty Products, general industrial and oil and gas. Sales were up equally in both end markets. We have benefited from prior realignment actions in Specialty Products which allowed us to gain operating leverage and convert nicely as we capture this incremental demand.

Operating profit increased to $8 million or approximately 10.1% despite higher material costs. Our focus in these businesses remains on improving efficiencies while seeking to capitalize on share gain opportunities. While we have completed the majority of realignment actions in this segment, continuous improvement always remains a focus. With respect to updating our guidance for Specialty Products, we are now expecting full year sales growth to be about 10%, up from 9%, while maintaining operating profit margin in the 10% to 12% range.

With that, I'll turn the call over to Bob to discuss additional financial results and our raised full year 2018 outlook. Bob?

Thank you, Tom. Turning to Slide 11, I will begin my comments with a review of our year-to-date financial results which are very consistent with the quarterly performance Tom discussed earlier. Net sales increased $43.3 million or 6.9% compared to the prior year period with sales growth occurring across the majority of our end markets. Operating profit increased 8.3% to $90.3 million and operating margin improved by 20 basis points as the impact of higher sales volumes, operational improvements and previous realignment actions more than offset the impact of higher material and freight costs during the first 9 months of the year.

On a year-to-date basis, diluted EPS was $1.37, an increase of 25.7% as compared to $1.09 in the year ago period. Nearly one half of the year-over-year EPS growth was driven by the impact of higher sales and operational improvements, while the remainder related to a lower effective tax rate in 2018 as a result of tax reform enacted in December of 2017.

Moving onto Slide 12, as Tom noted earlier, we delivered another quarter of strong cash generation. Free cash flow was $27.4 million which represented 123% conversion of net income as compared to $22 million in the year ago period, this despite a modest investment in networking capital to support higher sales activity.

On a year-to-date basis, we generated free cash flow of $70.70 million, as compared to $63.5 million in the year ago period, an increase of 11.2%. Through third quarter, we used approximately $3.6 million of our free cash flow to repurchase more than 124,000 TriMas shares. We also capitalized on recent broader market volatility and were able to repurchase an additional 112,000 shares through October 29 for approximately $3.1 million.

Cumulatively since we initiated out buyback program in second quarter of 2018, we have purchased approximately $6.7 million worth of stock or slightly more than 236,000 shares against our open buyback authorization of $50 million.

On a year-to-date basis, we reduced net debt $61.8 million and by more than $98 million since September 30, 2017. LTM-adjusted EBITDA improved approximately 9% or $13.1 million to $163.7 million versus the comparable period a year ago. And we reduced our leverage ratio to 1.5x at quarter-end. As of September 30, 2018, we reported cash and available liquidity of approximately $364 million.

In summary, our Q3 results were largely consistent with the trends and operating performance established in the first half and demonstrate continued improvement on a year-over-year basis.

Turning to Slide 13 and an update to our 2018 full year guidance, given the stronger-than-expected volumetric sales growth in the first 9 months of the year, we are increasing our full year 2018 guidance for organic sales growth from 5% to 6%, driven principally by higher sales in our Packaging and Specialty Products segments. We are also raising and tightening the range of our full year 2018 EPS guidance to $1.72 to $1.78 from our previously provided range of $1.65 to $1.75 and from our original guidance provided in February of $1.60 to $1.75. This increase raises the EPS midpoint guidance to $1.75 per share, representing an improvement of approximately 25% over 2017. We are increasing EPS guidance despite $3 million to $4 million of incremental costs roughly split evenly between commodities and tariffs that we expect to incur in fourth quarter compared to the year ago period and nearly $10 million in such costs for the 2018 year in total.

As Tom noted earlier, we continued to experience higher commodity costs in third quarter, particularly with respect to resin and steel-based inputs. And we anticipate these cost pressures will continue during Q4. We continue to engage with our operating teams on these matters, identifying ways to mitigate the impact of higher commodity costs as much as practical. In some cases, we have auto material escalators and in other cases we have taken pricing actions depending on end market competitive forces. We also expect to see a greater impact in Q4 of expanded tariffs on imported products. With respect to tariffs, the landscape is a bit more fluid as those lifts with the most significant impact to our businesses have just recently taken effect. In the near term, we expect to mitigate much of this exposure through pricing actions, again, depending on contractual terms and market competitive forces.

Longer term, we expect to mitigate exposure through managing supply opportunities, redirecting where practical sourcing locations including insourcing and of course continuous improvement. Over the remainder of the year, we anticipate that our businesses will recover approximately 80% of the Q4 incremental commodity and tariff costs. In addition, year-to-date higher volume in some of our end markets has helped provide an offset to some of the increased costs we are experiencing and we anticipate that end market strength will continue.

As a reminder, our fourth quarter is typically our lowest sales and profit quarter of the year given lower levels of production activity due to holidays and yearend customer shutdowns. Nonetheless, with all these items taken into account, we are pleased to be able to raise our EPS guidance midpoint by $0.05.

Lastly, we are reaffirming our full year 2018 free cash flow guidance at 120% of net income. We continue to emphasize cash conversion of increased operating earnings while optimizing our investment in net working capital relative to higher levels of end market sales activity. We expect our tax rate for the year to be near the lower end of our previously provided range of 22% to 24% and CapEx, although running at a lower level year-to-date through the first 3 quarters, to end the year at approximately 3% of sales.

At this point, I will now turn the call back to Tom for his final remarks and wrap-up. Tom?

Thank you, Bob. Prior to opening up the call to Q&A, I would like to share with you why I am so excited about the future prospect for TriMas on Slide 14. First, we are pleased with our year-to-date results and our overall performance improvements. Not only have our internal planning processes improved through the TriMas business model, there is significantly less variation between our GAAP and Non-GAAP reported results and we have been able to raise guidance despite increased material and anticipated tariff costs.

We have not only been operationally improving TriMas' businesses, but we are starting to see the benefits of our investments in innovation and growth. For example, our Rieke business continues to develop a well-coordinated engineering approach by leveraging its innovation centers of excellence on 3 continents and is actively quoting on multiple ecommerce programs as well as other new product developments relating to package sustainability, child safety, and convenience. Our TriMas Aerospace engineering and commercial teams are working on a number of projects for our OEM customers to develop even lower weight fasteners and automated installation ready fasteners. We expect to work with our customers to qualify new design solutions that will continue to differentiate TriMas Aerospace.

In addition to our focus on sales growth, we will always drive continuous improvement in all that we do and we will do this through championing a culture of Kaizen. For example, this year we launched the TriMas Kaizen challenge, an internal competition highlighting some of the best Kaizen projects from all of our businesses. We received 27 submissions from 19 different locations in 7 countries. These entries demonstrate employee engagement, process improvement and capital expenditure savings which all make TriMas better for the future.

Over the past year, we have also been working on reassessing the strategic and performance characteristics of each of our businesses. We continue to make significant progress, which along with strengthening our cash flow generation and balance sheet, has allowed us to better focus our corporate development initiatives. Although there is nothing to announce on this call, we have been diligently working on opportunities to broaden our better performing businesses through M&A, and as demonstrated previously, de-emphasizing certain products or product lines that have been in more challenging end markets.

Finally, we have strong cash flow that creates multiple levers to drive TriMas' value. For example, we have already significantly de-leveraged, started to buy back shares, extended our financing maturity and increased liquidity. Our solid balance sheet positions us well to further enhance TriMas. We will continue to reinvest in our higher return businesses, execute both on acquisitions to accelerate growth, and return or transfer capital, all to enhance shareholder value. As you can see, we remain excited about our prospects for TriMas and are pleased to have delivered such a strong year-to-date performance. We believe we are on the right path and we appreciate the support of our shareholders, our customers, and our employees.

At this point, I would like to thank you for listening, and we will now turn the call over to the Operator for Q&A. Operator?

(Operator Instructions) Our first question comes from Steve Barger with KeyBanc Capital Markets.

Good morning, guys. This is Ken Newman on for Steve. Thanks for taking my question. The first question I have here today is just on your Chinese exposure in general. We've been hearing a lot of commentary throughout earnings seasons about concerns about weakening Chinese macro environment. Any commentary or color you would have in that market and what you're seeing and hearing from customers in that region?

Well, we do have some sales into the indigenous market, but for the past few years, we've been growing in that market, so it's been a nice contributor to TriMas.

Understood. So you're, just to clarify, you're not seeing any kind of weakening in inquiry levels within the health and beauty market in that region?

Not anything meaningful at all. Keep in mind, it's a relatively minor portion of our sales overall in HBC and in Packaging.

Got it. Then for my follow-up question, I just wanted to touch on the free cash flow. It's been pretty strong over the last 3 quarters and the guidance is very positive it looks like here. You did talk about opportunities for M&A. Just curious if you could talk about what you're seeing in the pipeline in terms of further opportunities, what are you really focused on, and where, what kind of multiples you're seeing for deals that are crossing your desk?

Good question. We continue to see a pretty reasonable pipeline of opportunities. It is a very competitive M&A market. We're predominantly focused in broadening and enhancing our Packaging segment, but we're studying deals in other segments as well. But there are -- when we look at the types of areas we want to expand or get into or grow into, we're seeing enough opportunities out there that have us excited.

(Operator Instructions). Thank you. Our first question comes from [Katia Jenka] from BMO Capital Markets.

Sorry, I was on mute. Can you talk a little bit about more about pricing in each segment? Has there been any price increases and a little bit about outlook?

Yeah, I think in terms of pricing, kind of on a consolidated factor, you know, we've been able to recover a good portion of our higher material costs. Certainly not all, but enough to be able to deliver the performance that we have year-to-date through 9 months. If you go by segment, Packaging is very competitive, but in the case of a good portion of our Packaging business, we're able to pass through increased or decreased resin costs, as the case may be, based on auto escalators, based on resin price indices. And that typically happens kind of on a 90 to 120-day lag basis. With regards to steel in Packaging, that's really just based on sort of what the market will bear and generally speaking that business has been very effective at recovering price as evidenced by its very stable long-term margins in the 22% to 24% range. Within Aerospace, again, pricing there, a good portion of that work is contractually driven through LTAs. But at the same time, we need to be very market competitive there in the distribution end of that market. Generally speaking in Aerospace, we haven't seen nearly quite the price inflation or cost inflation as we have in the other 2 segments. And within Specialty Products, it's been largely driven with steel costs for our industrial steel cylinder business. We saw quite significant increases in steel if you went back to the first half of the year compared to the first half of the prior year. They have stabilized a bit here as we've moved through third quarter and while elevated, have seemingly ceased to increase. We've done a pretty good job of getting some pricing adjustments as steel has moved. Again though, it's a very competitive marketplace, so we have to be mindful of what our competition is doing as well.

Now when it comes to tariffs, can you maybe quantify how much of your COGS are exposed directly and indirectly?

Well tariffs from -- direct costs for us on an unmitigated basis, is about, in the fourth quarter is roughly $2 million. And if we look at it on a run rate basis, tariffs are increasing as I think we move into 2019. The annual exposure or cost exposure there could be upwards of $10 million.

(Operator Instructions) Sir, I am currently showing no further questions in the queue. I would now like to turn it back for closing remarks.

All right, thank you very much. I'd like to thank those on the call for listening and we're, as a management team, we're very pleased to have delivered such a strong quarter to our shareholders. And we look forward to our next update call. Thank you very much.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may now disconnect.